Crypto Coalition Unveils Technical Proposal to Mitigate Aave Token Exploit

In a rare instance, a $300 million deficit may have a prescribed solution. DeFi United, a coalition consisting of multiple blockchain projects and crypto ecosystem individuals, has devised a meticulous plan to restore rsETH's backing after the recent Kelp DAO hack, which released over 116,000 unaccounted-for tokens and disrupted DeFi lending markets. The proposal, shared on Aave's official X account, details a coordinated effort to utilize Aave's infrastructure and stabilize the markets. The incident occurred on April 18 when an attacker exploited a vulnerability in rsETH's bridge, creating 116,500 rsETH without backing by forging a legitimate message. These tokens were dispersed across multiple wallets and utilized in DeFi, with a significant portion used as collateral on Aave and other lending platforms, thereby creating a systemic issue. Protocols like Aave found themselves holding unbacked collateral, and according to the proposal, most of the exploited funds remain active, with approximately 107,000 of the original 116,500 rsETH tied up in positions across Aave and Compound. To address this, DeFi United's proposal aims to restore rsETH's backing and unwind the loans created using the extra tokens simultaneously. The group claims to have secured sufficient ETH commitments to fully re-collateralize rsETH and plans to feed this ETH back into the system in stages, converting it to rsETH and depositing it to ensure the token is fully backed. Meanwhile, the proposal focuses on the lending markets where the damage is most evident, intending to carefully unwind the mess instead of letting it play out chaotically. This involves dealing with the positions the attacker opened on Aave, which are essentially loans backed by rsETH that should not have existed. Rather than waiting for these loans to collapse, the proposal suggests temporarily adjusting rsETH's valuation to enable the smooth closure of these positions, allowing the recovery of underlying assets like ETH. The proposal estimates that around 13,000 ETH could be freed from Aave alone, which would then be converted into ETH to cover the shortfall created by the exploit. The process relies on governance approvals, the successful deployment of committed funds, and smooth execution. If successful, the plan aims to fully restore rsETH's backing and stabilize the affected markets.